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Do Airline Stocks Have More Room to Run?

A Midsummer Night’s Dream! Time to travel to the lakes, the beach and the mountains. The Airline Transportation industry is what caught my attention in July.

Zacks Industry Rank System put Airlines at #13 out of 265 industries we rank. That puts this 25-company-strong group into the top 5%.

YTD returns have been +19.8%, while the S&P 500 offered +10.8%. This spells out a nice share price outperformance. But can it continue?

Returns

Putting a share price bottom in July 2016, airline stocks soared across 2H-16 and 1H-17, led by two of the three biggest players: American Airlines (AAL - Free Report) and United Continental (UAL - Free Report) .

Indeed, shares of American and United nearly doubled. Investors started to gain confidence unit revenue was ready to rise again, after two years of steady declines.

Over the last three years, falling oil prices have helped airlines return to higher profits, ending a rough patch that saw many carriers file for bankruptcy.

While the benefits to lower fuel prices are mostly priced in now, this industry group still offers investors good long-term investment options.

In July 2017, these fundamental supply conditions continue to make airlines a good bet: ongoing low fuel prices, low seat capacity and consolidation. On the demand side, investing in the airline industry is a way to capitalize on improved consumer balance sheets, too. Air travel leads GDP growth by a country mile.

Global commercial airlines made record net profits in 2016 at about $35 billion, according to the International Air Travel Association (IATA). That's way up from nearly $14 billion in 2014 -- and about the same as in 2015. North American commercial airlines felt the upswing the most, with about $20 billion of that 2016 profit.

Even Warren Buffett, who had been quite publicly averse to airline investments in the past, announced in fall 2016 his purchase of stakes in American, United, Delta (DAL - Free Report) and Southwest (LUV - Free Report) .

All four stocks continue to experience a nice momentum price run.

To sum things up, investors have reason to continue to be bullish on air travel. But domestic commercial airlines multi-month stock price run has some traders questioning whether enough future catalysts are left in the fundamental drivers --to get in now -- and still achieve above-average returns.

American at $54 a share, for example, is back at the top of its stock price range. This price was last seen in the first half of 2015.

And forthcoming IATA travel revenue data for 2017 may be lower. Read on for that story.

Risks

The airline industry shoulders a lot of significant risks. Macro factors like sudden shifts in personal disposable income and spending patterns, safety concerns like terrorist attacks, oil price shocks and covering analyst sentiment -- all of these can turn quickly. They weigh on airline profits.

In addition, the USA “welcome mat” has been selectively removed from our airports. The world’s tourists (more broadly) have taken notice.

Executive Order 13769, titled Protecting the Nation from Foreign Entry into the United States was an executive order issued by U.S. President Trump. It was in effect, except to the extent blocked by various courts, from January 27th, 2017, until March 16th, 2017, when it was superseded by Executive Order 13780.

Prior to March 2017, the time of the 2nd travel ban, New York City had forecast in 2016 an increase of +400,000 foreign visitors to the city in 2017, marking consecutive years of growth since the Great Recession of 2009.

Forecasts made after the travel bans predicted a decline of 300,000 foreign visitors to New York in 2017. Foreign tourism nationwide mirrors New York City with a forecast change from a 4% increase in foreign travelers to the USA in 2017 now predicting a 3% decline.

Once in the USA, foreign visitors spend about 4 times more per day than U.S. resident travelers in the USA. These foreign visitors sustain about one million travel-related jobs. (This data is from CNN.)

An article in the Chicago Tribune on March 6th gave more data on the anticipated decline in foreign visitor arrivals to the USA.

In March 2017, Los Angeles projected 800,000 fewer international tourists in the period 2017-2019 and a $736 million drop in spending.

Miami Airport, the second largest number of international visitor arrivals next to New York, had seen a 52% decline in flight searches compared to 2016 according to Kayak.co.uk.

San Francisco expected a 1.8% increase in foreign visitors in 2017, with a large increase in Chinese visitors expected to offset a decline in European tourists.

Tourism Economics forecasts projected 4.3 million fewer visitors to the USA in 2017, with $7.4 billion in lost revenue.

Let’s see what actually happens. The U.S. Supreme Court will hear arguments and write its opinion on the travel ban later this year or early next year.

As to longer-term risk management -- going forward -- look for order deferrals on large aircraft. This is not usually a good sign, on future demand at that particular airline.

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At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1988 it has more than doubled the S&P 500 with an average gain of +25% per year. These returns cover a period from 1988-2017. Zacks Rank stock-rating system returns are computed monthly based on the beginning of the month and end of the month Zacks Rank stock prices plus any dividends received during that particular month. A simple, equally-weighted average return of all Zacks Rank stocks is calculated to determine the monthly return. The monthly returns are then compounded to arrive at the annual return. Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zack Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations.

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